Since time immemorial the medical sciences have been hounded by the concept of iatrogenesis. 'Iatros' meaning 'healer' and 'genesis' meaning 'from' in Greek – literally translating into 'from the healer' or 'caused by the healer'. A quick reference check into Wikipedia shows that iatrogenesis refers to the unintended downside consequences of unnecessary medical intermediation. Medical history is littered with examples of iatrogenesis. A famous example is that of the “Doctor’s Plague” – where it was found that the mortality rate of women who delivered with the help of medical students and professional supervising doctors was about 15% versus for those women who delivered with the help of the traditional midwife was about 2%. In other words the mortality rate for those women delivering with professional doctors was about 7X those delivering with traditional mid-wives!! Many books have been written about this fascinating story – and it brings to us lessons that we must take seriously.

I say with not much pride that the profession of investment management brings its share of iatrogenesis to investors simply through the need for activity and complexity. Financial intermediation as a profession in today’s world seems to justify its worth through frenetic and complex activity. Examples are many and to quote a few – 'sophisticated' investment linked insurance products, complex strategies that result in massive portfolio churn, complex structured products that attempt to subvert the risk-reward conundrum. The industry believes that its existence is validated only if there is activity and complexity – for if there is no activity or complexity, the investor does not see the justification in paying.

Note that this activity and complexity translates into costs for the investor, which are not trivial. 'Sophisticated' investment-linked insurance products have massive distribution (commission) costs embedded in them sometimes costing the investor as much as 20% of his corpus. Complex strategies that result in portfolio churn of 200% a month – amounting to a 2400% portfolio churn a year, result in brokerage fees alone of about 2% of the investor portfolio per year. All this activity to what end and complexity at what risk are seldom discussed.

At Aroha Capital, our investment philosophy rests on two pillars – viz. simplicity and low cost. By simplicity, we mean to either invest in safe and tax-efficient liquid funds or low-cost index-based mutual funds/ETFs or when we wish to take on risk we embrace it whole-heartedly with a small basket of high conviction direct stock ideas. Risk at an investor level is controlled by simply tailoring the exposure % of the investor to each of these instruments. Portfolio churn is less than 15% of the portfolio size and the tax incidence for clients is very low to nil. Brokerage costs are kept at probably less than 0.1% of the portfolio and most mutual funds are bought DIRECT thus avoiding commission and distribution costs. Nevertheless for a small portion of liquid funds we are forced to procure through a distribution platform, which we intend to further eliminate through the use of a newly formed entity known as mfutility. MFutility is, as I believe, the only platform in India that allows investors to buy mutual funds in the DIRECT mode online. Aroha Capital has initiated the process of registering with mfutility. Once this is done, we will be approaching clients to also register on mfutility such that in the future we could transact online in mutual funds in the DIRECT mode.

Coming to the idea of justifying our presence through 'activity', the ongoing incessant rise in the markets is resulting in relative underperformance of client portfolios, which are benchmarked against the SENSEX. There is a risk of the investment adviser – that is us, to get carried away in the frenzy of the moment and start churning client portfolios to 'catch-up' with the market. We are confident that this 'catch-up' game will happen – not through extra activity or portfolio churn on our part, instead through, first the tempering of market-wide euphoria and second through the judicious and careful selection of high conviction ideas, which will work their way through portfolios over time. As we always say – time will be the judge.